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Abstract:Forex strategies can be divided into a distinct organisational structure which can assist traders in locating the most applicable strategy.
A forex trading strategy defines a system that a forex trader uses to determine when to buy or sell a currency pair. There are various forex strategies that traders can use including technical analysis or fundamental analysis. A good forex trading strategy allows for a trader to analyse the market and confidently execute trades with sound risk management techniques.
A top-level overview of forex strategies
Forex strategies can be divided into a distinct organisational structure which can assist traders in locating the most applicable strategy. The diagram below illustrates how each strategy falls into the overall structure and the relationship between the forex strategies.
1. Price action trading
Price action trading involves the study of historical prices to formulate technical trading strategies. Price action can be used as a stand-alone technique or in conjunction with an indicator. Fundamentals are seldom used; however, it is not unheard of to incorporate economic events as a substantiating factor. There are several other strategies that fall within the price action bracket as outlined above.
2. Range trading strategy
Range trading includes identifying support and resistance points whereby traders will place trades around these key levels. This strategy works well in market without significant volatility and no discernible trend. Technical analysis is the primary tool used with this strategy.
3. Trend trading strategy
Trend trading is a simple forex strategy used by many traders of all experience levels. Trend trading attempts to yield positive returns by exploiting a markets directional momentum.
4. Position trading
Position trading is a long-term strategy primarily focused on fundamental factors however, technical methods can be used such as Elliot Wave Theory. Smaller more minor market fluctuations are not considered in this strategy as they do not affect the broader market picture. This strategy can be employed on all markets from stocks to forex.
5. Day trading strategy
Day trading is a strategy designed to trade financial instruments within the same trading day. That is, all positions are closed before market close. This can be a single trade or multiple trades throughout the day.
6. Forex scalping strategy
Scalping in forex is a common term used to describe the process of taking small profits on a frequent basis. This is achieved by opening and closing multiple positions throughout the day. This can be done manually or via an algorithm which uses predefined guidelines as to when/where to enter and exit positions. The most liquid forex pairs are preferred as spreads are generally tighter, making the short-term nature of the strategy fitting.
7. Swing Trading
Swing trading is a speculative strategy whereby traders look to take advantage of rang bound as well as trending markets. By picking ‘tops’ and ‘bottoms’, traders can enter long and short positions accordingly.
8. Carry Trade Strategy
Carry trades include borrowing one currency at lower rate, followed by investing in another currency at a higher yielding rate. This will ultimately result in a positive carry of the trade. This strategy is primarily used in the forex market.
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